LST-backed stablecoins are one of the hottest trends in DeFi.
We sat down to discuss this last week with Lewis from Gyroscope, MajeStyle from Gravita, Richard from Prisma Finance, Guy from Athena Labs and Mai from Curvance.
In case you missed it, here are the top questions from the event.
What are LST-backed stablecoins and how do they work?
”For users on Gravita it is a simple experience. You can take an LST like swETH, deposit it and then borrow our stablecoin GRAI up to a certain LTV. It is great to see a number of other protocols have a similar approach to the problem of borrowing against yield generating collateral, and it is interesting to see how there is no one single approach that is perfect or right for users. The main benefit for users on Gravita is that they can use the stablecoin they have borrowed to generate further yield in DeFi, as well as benefit from the yield being generated by the collateralized swETH on the platform.”
– MajeStyle, Gravita
“Our model at Ethena Labs is slightly different to the other protocols in this space, where users are over collateralizing their position and borrowing against it with the stablecoin in that position. What we are trying to do is slightly different, where users are taking an LST and then hedging that collateral 1:1 with an Ethereum perp.”
– Guy, Ethena Labs
“One of the important aspects of having an LST backed stablecoin, whether it is the token itself or a derivative, is that the LST is the most decentralized form of collateral in crypto and so it bodes well for various designs. I think we are seeing a real product market fit for users that is flowing off the back of staking in general and the rise of liquid staking as well. In some ways the act of liquid staking is to rehypothecate that collateral and get more yield, and by minting stablecoins by whichever financial instrument or design you want, you are obtaining that leverage and liquidity without having to sell the underlying asset.”
– Daniel, Swell Labs
Compared to centralized stablecoins, what is the niche that LST-backed stablecoins occupy?
“There is a barrier of entry with centralized stablecoins, where if you want to onboard or offboard UDSC as a minter or redeemer you need to go through a KYC process. We have also seen more centralized options try to bring treasury bills onchain, but there are a lot of restrictions and most users can’t touch that so I think that decentralized models are a lot more approachable and actionable for users.”
– Mai, Curvance
"LST-backed stables also provide an important niche for LSTs themselves, giving them the ability to incentivize more yield, so as to compete with the real-world asset yields of TradFi. At some point this could entice funds to LSD protocols from not only TradFi but also from basic staked ETH. There is ~$25b staked ETH not in liquid staking tokens, if I recall correctly."
– Richard, Prisma
“Building a stablecoin that is non-custodial and decentralized would be immensely valuable for the space so I think that users are right to want such a thing to exist, and it is very clear what the limitations of the centralized models are in terms of trust.”
– Lewis, Gyroscope
“LST-backed tokens have an advantage as there is always a big part of the DeFi user base that will always look for the highest yields or best-performing assets. In time we will also start to see users become interested in the core DeFi values that allow us to be where we are today, which at Gravita we are trying to present very well with our promotion of censorship resistance, decentralization and enabling LSTs as collateral.”
– MajeStyle, Gravita
How do you see LST-backed stablecoins progressing over the next few years?
“I believe there is going to be a focus on the decentralization aspect, with yield being a main focus for stablecoins, better mechanisms for liquidations or perp offsets, and higher LTVs with novel technology that comes out allowing users to deploy stablecoins elsewhere to generate extra layers of yield – whether that be from LPing in AMMs or in a lending market.”
– Mai, Curvance
“The fact that in DeFi you have different asset classes that are allowed as collateral and you can easily use yield assets as a collateral form is extremely compelling. Over time the space will grow and we will see an influx of real world assets onchain that can be used as collateral and not just sit there as a representation of ownership. In this space it is important that there are a variety of choices that serve the values of all users and their needs.”
– MajeStyle, Gravita
"Looking at the landscape now, traditional finance is attracting funds in this risk-off environment to something less risky for decent yields. So how does crypto compete with that? Truth is it might not, you could argue it isn’t right now, of course. But once these mature and the LSD protocols enable more yield for their tokens, for example voting for PRISMA incentives for their depositors on Prisma, and rates pull back a bit and we get back to risk-on, the whole staking + stablecoin + more yield space will be very attractive, and again, hopefully help create that fluid liquidity that played a role in stoking the DeFi fire back in 2019/20."
– Richard, Prisma
Is there a future where under collateralized loans and stablecoins exist?
“I believe that there have been a few attempts at under collateralized loans onchain. These work by allowing users to have their own wallets where they can interact with platforms and try to grow their capital however they are quite limited with their options on where to deploy their assets.”
– Mai, Curvance
“Under collateralized stablecoins are similar to the stablecoins that already exist in traditional finance. The big assumption around under collateralized stablecoins is trust. We have seen a lot of attempts at algorithmic stablecoins but they often grow to a point where there is not enough liquidity to maintain the value. In some ways this problem will be easier to tackle as the ecosystem grows.”
– MajeStyle, Gravita
“The solution would probably require maturation in zero-knowledge (ZK) technology. Part of the reason that we couldnt do under collateralized loans is because of limitations around disclosure, and an inability to do proper underwriting without running against the principles of DeFi: transparency and pseudonymity. Zk-proofs could provide a way to preserve privacy and underwrite trustlessly in a way that enables uncollateralized and unsecured lending. From there we would see more complexity built on that, and more new cryptoeconomic primitives.
– Daniel, Swell
Thank you to everyone for attending this Twitter Space!
